ETFs may be the cheapest way to play an asset class, but they're not always the best. Why to look elsewhere for exposure to junk bonds, microcaps, and emerging markets.

For all their virtues, exchange-traded funds aren't ideal for all for asset types. Like other passive funds, these index-tracking investments work best in deeply liquid markets, and tend to suffer when an underlying market is idiosyncratic or thinly traded.

This is a widely understood problem in the fund industry, but that hasn't stopped firms building trackers for challenging markets. The result is that scores of passively-managed funds have inherent disadvantages to similar, actively-managed funds. At worst, these...